The Last Vigilante Part III
In "Anything But Treasuries — and JGBs", the last part of the Last Vigilante triology (part 1, part 2), Bill Gross extended his vision to international fixed income market.
First, he concludes that "a country’s interest rates should be correlated rather closely to its nominal GDP growth." In a comparison between Germany and United States, it is apparent that US treasury is way overvalued in this angle. (US 10-year treasury is 203 bps below GDP while Germany's 10-year bond is 275 bps higher.)
Second, Bill correlates 10-year government bond to the current account balance as % of GDP. It is commonsense that for countries in current account deficit, higher interest rate is needed to compensate. In other deficiting countries like UK, Australia and New Zealand, the current 10-year government bond rates are all higher than the best-fit line while US is way below. Japan's government bond is also substantially below the best-fit line (Japan is in surplus though), indicating JGP may also be overvalued.
Bill thinks increasing international exposure is another way out in this sure-loss domestic fixed income market. Investors can get the desired duration and better income in places like Germany and UK. (The other way is to decrease duration, as mentioned in last month's Investment Outlook.)
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